Repurposing Property to Make Warehousing: Major Opportunities, Major Hurdles

the one minute takeaway

During the COVID-19 pandemic, an explosion in e-commerce drove high demand for warehouses. For real estate owners and operators hit hard by shutdowns, the prospect of repurposing property into warehouse space offers a major opportunity — but it’s not without risks. Here’s what you need to know.

Since the COVID-19 pandemic hit, e-commerce sales have risen 32%.¹ That’s had major implications for both retailers and transportation companies.

Retail real estate struggled, but the boom in e-commerce led to a spike in demand for last-mile delivery and warehousing space near urban centers.

As retailers shift operations from stores to e-commerce fulfillment centers, many large retailers are repurposing existing spaces or looking to move into warehouses. Some retailers are even expanding to include trucking services into their business model, and some fleet operators are moving to incorporate warehousing into their offerings, while adding lighter trucks (called “sprinters”) to their fleet of big rigs.

For property owners, repurposing their real estate into warehousing represents a major business opportunity in an industry that’s had few bright spots over the past year. The need for warehouse space appears to be endless, driving demand for an additional 1 billion square feet of industry space by 2025.¹ Even before the pandemic, shuttered malls were being converted to warehouses and fulfillment centers.

The risk and insurance implications of moving to warehousing

As property owners consider repurposing real estate to warehouse space, they’ll need to consider not only to remodel the property itself, but how the change affects their business, risk and insurance.

Here’s four considerations that real estate owners need to consider when repurposing property to warehousing:

New or upgraded building systems. With the abundance of flammable materials in warehouses that serve as distribution or fulfillment centers, the design of fire and life safety systems is vastly different for a warehouse than a big box retail space. Mechanical systems that regulate air flow, which are especially important in the COVID-19 pandemic, also have different needs in a warehouse versus other types of properties. Plumbing systems may need upgrading to protect against floods that could damage the property and plant.

And it’s essential that property repurposed to warehousing have adequate electrical systems and backup, which may entail installing generators. Without new or upgraded systems, a property owner won’t be able to market the space as a viable warehousing facility, much less get it insured.

In one case, a manufacturing space that had been repurposed as a beverage warehouse did not have the proper cooling system, exhaust system or alarms in place. Over an extended weekend in which temperatures reached record highs, condensation from bottles formed and pooled in cardboard boxes stacked 20 high. Eventually, the condensation destroyed the structural integrity of the boxes and caused the stacks to collapse, leading to a total loss.

There’s more complexity. Owning a warehouse can be far more complicated than being a retail landlord. Because products move in and out of a warehouse, there are implications on risk and insurance. For instance, there are ownership implications of a product coming into a warehouse, which leads to legal issues. Before repurposing, it’s important to understand the complexity of the warehousing business and have proper risk management.

Premiums are tied to safety. Residential developments are rarely built near warehouses, as large amounts of shipping materials increases the fire risk. The heightened risk of fire and accidents with warehouses not only affects the type of coverage but the cost of coverage — and better risk management can result in lower premiums. Before repurposing to warehouse space, investigate the coverage implications and how they will affect costs.

Liability for warehoused products. Warehouse owners assume responsibility for all products and materials housed in their space. Policies such as warehouse legal liability policies insures against damages to warehoused products, covering damages caused by a fire, theft or negligence.

Contact your HUB Transportation or Real Estate expert for more information on upgrading your space to a warehouse distribution facility.

¹ Digital Commerce 360, “For retail chains, 2020 was a year of avoiding contact,” April 20, 2021.

² CNBC, “U.S. may need another 1 billion square feet of warehouse space by 2025 as e-commerce booms,” July 9, 2020.